Diggle has over 16 years of experience in trading equities
and equity derivatives in both Asia and Europe. He was formerly
Head of Asian Equity Derivative Trading as well as former
Head of European Emerging Markets at Lehman.
The Artradis Barracuda fund is an Asian equity arbitrage
fund. It employs multi-strategy market neutral trades such
as warrant arbitrage, index arbitrage, stock class arbitrage,
convertible bond arbitrage, volatility arbitrage, volatility
dispersion and dividend arbitrage.
The Artradis Barracuda fund was down 0.7% for September 2002
and is up 4.9% since inception in May 2002.
- What are your views on the convertible bond (CB) arbitrage
strategy at the moment? Though the strategy has underperformed
(even with record volatility in the US and Europe) there
have been no major blow-ups; do you think one will occur?
You can't predict a blow up - all you can do is make
a judgment of risk/reward in the market. Even in the past,
when we believed Western companies' reporting, the market
would repeatedly surprise us, it seemed to happen every
four years and the last blow-up was 1998, so we are due
for one. The risk of a blow-up is perceived to be higher
at present and I think that's right, particularly in the
US where the issuers have been of lower quality. I can't
predict whether a market meltdown will occur but we don't
like the risk/reward in convertibles at the moment and
have largely avoided them.
The Asian convertible market is badly in need of some
new issuance- many, if not most, of the bonds out there
are really trading as debt instruments and have little
embedded optionality which is what really interests us
as we are equity players and don't pretend to be credit
experts.
Having said that, we are very optimistic about the prospects
for convertible bond arbitrage in 2003 if the issuance
environment improves. The maturity and flexibility of
credit-hedging instruments in Asia has improved significantly
and that should allow us to specify the risks we take
in CB's a lot more accurately than in the past.
- What are your opinions on the viability and profit
potential for the depository receipt/local share arbitrage
strategy?
I think it is viable and, in fact, has worked well this
year; but it's a dangerous strategy full of cautionary
tales of markets staying illogical longer than people
could stay solvent. Unlike a lot of other arbitrage trades
it is usually a pure convergence trade and that calls
for a different, more cautious, approach than other strategies.
-
What are the current levels of volatility in Asia
and where do you see them heading?
Asian implied volatility levels vary widely at present;
with Korea pretty high at 41% but Australia seemingly
stuck at 14% and India is also really low when it trades.
Japan is above its long-term averages, but given the market
is near 19-year lows and that the possibility of major
policy change exists, it's really surprising it's not
higher.
The thing that has confounded all of us, however, has
been that Asian volatility has been so much lower than
that in the US or Europe. You could have got yourself
very good odds on S&P implied volatility exceeding
Hang Seng volatility for a prolonged period but that's
exactly what's happened. Asia seems to have become a safe
haven of late.
Selectively we see implied volatility in Asia rising
in the short term and expect the relationship of Asian
volatility to the rest of the world to return to a more
normal pattern of generally being higher.
- What strategy or strategies have worked best since
the launch of the Fund?
We started trading in May and, as I mentioned previously,
we've largely avoided convertibles. The strategies that
have disappointed us the most have been the volatility
strategies where we have generally been long volatility
and there has been a surprising absence of volatility
in Asia despite rampant volatility elsewhere in the world.
Other strategies have performed well - warrant arbitrage
and index arbitrage in particular have done well for us.
- You traded similar strategies as a proprietary (prop.)
trader, what are some of the surprising differences between
being a proprietary trader and a hedge fund manager?
You're always told that you'll miss the information on
flow you get when you work at a brokerage firm, but we've
found that that isn't really the case which has been a
nice surprise. In fact, the broking flow can distract
and confuse you as often as it enlightens you, and I think
we're happier without it.
Of course being at a very small organisation with self-built
infrastructure is completely different from being part
of a hugely resourced machine and you do miss having some
of those resources to call upon. But the biggest difference
for us, I think, has been the discipline of efficient
asset allocation you have to employ within the context
of a fund. As a prop. trader if you need more capital
you can always make your case for more - unwinding positions
you like to make way for positions you like even more
has been a new, and somewhat strange, experience which
has taken some adjusting to.
On the whole, however, the ability to focus solely on
trading and risk/reward has been a great experience as
there are a lot of other factors coming in to play when
you are a prop. trader.
-
Have the execution systems at the hedge fund been
to the level that you would like?
This is one area where things have improved hugely for
hedge funds. Direct market connectivity has started to
revolutionise institutional execution and there are some
very competitive offerings available now. We've invested
a lot of time and money in our execution systems and have
a passion for reducing our latency. As a trader you'll
never be fully satisfied with your execution systems but
we are pretty happy with what we've got available today
and are confident it will only get better, faster and
cheaper.
- Asia and Japan have historically been an equity long/short
game for hedge funds; there have been very few multi-arbitrage
funds. What are the reasons for this?
That's a bit of a mystery to us as we see the market
as full of opportunities compared to Europe or the US
although the number of Japanese listed vehicles are fewer.
It's certainly a more complicated and perhaps compromised
playing field in Asia and one in which experience is vital
because of the numerous pitfalls. Most of the long/short
managers in Asia have come from traditional asset managers
that have generally not done much arbitrage-type activity
in Asia so this may be a contributing factor.
- Some investors believe that it is very difficult to
monitor risk in a multi-arbitrage strategies hedge fund
because new risks always "pop up" unexpectedly
(and the manager realises it too late). Do you believe this
is a legitimate concern?
Concerns about risk are always legitimate as they lie
at the heart of the hedge fund industry. I believe it
is harder to measure and specify the risk in a multi-arbitrage
fund which uses a lot of derivatives as most of the traditional
tools of analysis like Value at Risk (VaR) don't really
work that well; but there are plenty of other established
risk measurements that can do the job and are used in
the derivative industry. These can monitor and measure
mathematical risk perfectly well. We've been trading derivatives
in this part of the world for a while and feel we've seen
quite a lot of things that can go wrong.
However, we believe that 'risk is the thing you haven't
thought of and aren't prepared for and I think that applies
to any asset manager regardless of strategy. We spend
a lot of time stressing the portfolio as well as thinking
up possible scenarios that could cause problems but you'll
never imagine them all, as we saw on September 11th.
For investors I think the biggest risk usually comes
from choosing a manager, their skill and integrity are
of paramount importance, rather than the style of the
fund.
-
What were the reasons for running the Fund from Singapore?
We thought it was essential to run the fund from Asia -
the style of the fund pretty much requires that. We liked
Singapore for a number of reasons: the costs of good premises
and good people are very reasonable here and the telecommunications
and air links are excellent. It is a solid regulatory, banking
and legal environment and we were also attracted by the
authority's attitude to markets. Some financial centres
seem to have a somewhat ambivalent attitude to hedge funds
and the normal hedge fund activity of shorting stock. There
is no such ambivalence here. Added to that both Richard
Magides (co-manager) and I have young families and the housing
stock, schools and lifestyle here make it an attractive
place to raise a family.
-
What do you find are the negative factors of being
based in Singapore?
The only negative we've found so far to being in Asia is
that we don't yet have a large enough Asian investor base
in alternative assets. The big investors in the US and Europe
are a long way away and I think this has been a general
obstacle for investment into Asian-based hedge funds, but
attitudes in the US and Europe are changing and we see it
as a diminishing problem as investors become more comfortable
with the concept of Asian-based managers.
-
Are there any current marketing trips planned for
you or Richard Magides (co-manager)?
We haven't done that much marketing yet - we've been very
focused on getting the trading and systems operating effectively
and markets have been very unforgiving of late. I'm in Tokyo
next month for the big Goldman Sachs' Hedge Fund Symposium;
but generally we've found committed managers want to visit
us and do due diligence on our operation here in Singapore
anyway. We would prefer to spend an absolute minimum amount
of time marketing and a maximum amount of time trading.
-
Does the current asset level of the fund impede your
strategy?
Being small does have advantages in terms of being nimble
but we've found that our current small size restricts what
we can do on the OTC side. There are a couple of very attractive
trades we're keen to do but a lack of listed vehicles means
that OTC is the only efficient way to execute them, and
the minimum size requirements of those trades have been
prohibitive. It's a frustration for us but one we knew we'd
meet when starting.
